“Buy land, they’re not making it anymore.” — Mark Twain
Tax Smart Today. Flexible Tomorrow.
For real estate investors holding appreciated property, deciding what to do next can be complicated. Selling outright may seem like the simplest solution — but it often comes with a substantial tax burden that can eat into decades of growth. At the same time, continuing to manage the property may no longer fit your lifestyle, especially if you’re approaching retirement or looking to reduce risk.
A 721 exchange, also known as a UPREIT transaction, offers a strategic alternative. Instead of triggering taxes through a sale or rolling into yet another property through a 1031 exchange, you can contribute your investment property to a Real Estate Investment Trust (REIT) operating partnership.
In return, you receive Operating Partnership (OP) units, which represent a stake in the REIT’s broader portfolio. Over time, these units can be converted into REIT shares, providing access to liquidity, income, and diversification — all on a timeline that works for you. The structure allows you to defer capital gains taxes, step away from day-to-day management, and transition into a more flexible and professionally managed real estate strategy.
Why Consider a 721 Exchange
Tax-Deferred Exit
Contribute appreciated property without immediately recognizing capital gains — and avoid the pressure of finding a like-kind replacement under 1031 rules.
Built-In Diversification
Your property is exchanged for an interest in a portfolio of commercial real estate, reducing exposure to any single tenant, sector, or location.
Estate Planning Flexibility
REIT shares are easier to divide and distribute than physical real estate — and may qualify for a step-up in basis if held until death.
Professional Oversight
Shift from hands-on management to a REIT-managed portfolio operated by experienced institutional real estate teams.
Access to Liquidity
After a required holding period, OP units can be converted into REIT shares, which may be sold as needed to support income or spending goals.
No Replacement Property Deadline
Unlike a 1031, there’s no 45-day identification window or 180-day closing timeline — giving you more time and fewer constraints.
Built for Real Estate Investors in Transition
We work with clients who have owned income-producing properties for years — sometimes decades. They’re tired of property management, concerned about capital gains, or looking to simplify their estate. A 721 exchange provides a way to transition from concentrated real estate holdings into a more passive and diversified investment structure.
Unlike a 1031 exchange, which requires identifying and purchasing a new property on a tight timeline, a 721 exchange allows you to contribute your real estate directly to a REIT. There’s no need to take on another asset — and no need to manage it once you do.
Over time, the OP units you receive can be exchanged for REIT shares, offering flexibility around income, liquidity, and long-term planning.
From Real Property to REIT: How It Works
A 721 exchange is often part of a broader real estate strategy — and in some cases, it follows a 1031 exchange. For example, if your current property doesn’t meet the REIT’s acquisition standards, you might use a 1031 exchange to transition into one that does. Once held for a sufficient period, that property can then be contributed to the REIT through a 721 exchange.
When your property is contributed to the REIT’s operating partnership, you receive OP units that represent an ownership interest in the broader REIT portfolio. These units are illiquid but economically similar to REIT shares. After a holding period — often one year — they can be converted into actual shares of the REIT, which may then be sold on the open market. That conversion is a taxable event, but it allows you to time when, or if, you realize gains.
This flexibility also benefits your estate plan. If OP units or REIT shares are held until death, your heirs may receive a full step-up in basis, eliminating the deferred capital gain altogether.
Frequently Asked Questions
Both the 1031 and 721 exchanges are tax-deferral strategies for real estate investors, but they serve different purposes and lead to very different outcomes.
A 1031 exchange allows you to sell one investment property and defer capital gains by purchasing another like-kind property — usually within a tight 45-day identification window and a 180-day close deadline. You must stay actively invested in real estate, and you’re still responsible for managing tenants, maintenance, and other day-to-day ownership issues. The benefit is continued tax deferral, but the trade-off is continued involvement.
A 721 exchange, by contrast, is a way to transition out of active real estate ownership entirely. Instead of buying another property, you contribute an eligible investment property into a REIT’s operating partnership in exchange for Operating Partnership (OP) units. This still defers your capital gains tax, but it shifts your role from landlord to passive investor. Over time, OP units can be converted into REIT shares, giving you access to income and liquidity — without ongoing management obligations.
There’s also an increasingly common hybrid pathway:
Some investors use a 1031 exchange to acquire an interest in a Delaware Statutory Trust (DST), which qualifies as like-kind property. Then, after a recommended holding period of two years or more (and with no upfront agreement), a REIT may acquire that DST interest in exchange for OP units under Section 721. This DST-to-721 pathway can offer the best of both worlds — immediate tax deferral via 1031, followed by a future opportunity to convert into a REIT structure and fully exit the real estate ownership cycle.
It’s important to structure this carefully. The IRS requires that there be no pre-arranged agreement to convert the DST to a REIT at the time of acquisition, or it could jeopardize the tax treatment. We help clients navigate this transition step-by-step, coordinating with tax and legal professionals to ensure compliance and alignment with long-term goals.
Yes. REITs generally look for stabilized, income-producing properties that meet their investment standards. These could include apartment buildings, medical office facilities, industrial assets, or retail centers — provided they’re professionally managed and meet underwriting criteria.
If your property doesn’t qualify directly, a 1031 exchange may be used first to reposition into one that does. We help clients understand whether a direct 721 is feasible or if an intermediate step makes more sense.
OP units — short for Operating Partnership units — are what you receive when contributing your property to the REIT through a 721 exchange. They represent your proportional ownership in the REIT’s operating partnership and track the value of the REIT’s shares. These units are not immediately liquid, but they generally pay distributions and are convertible into REIT shares after a set holding period.
Once converted to REIT shares, they can be sold on the public market — triggering capital gains at that time. For many investors, this conversion is spread out or timed around life events, such as retirement or estate planning.
When you convert OP units into REIT shares, that conversion is a taxable event. You’ll owe capital gains based on your original cost basis and any depreciation recapture. That’s why the timing of the conversion is a key planning decision.
Some investors convert gradually over time, allowing for controlled recognition of gains and better income tax management. Others choose to hold the OP units indefinitely, using the income and planning for a step-up in basis at death — which can eliminate the deferred gain entirely for heirs.
Probably not. OP units are not publicly traded, and REITs typically require a minimum holding period before you’re allowed to begin converting them into shares. Even after that window, the REIT may limit how many shares can be redeemed at once, or how frequently.
If you need near-term liquidity — for example, to fund another investment, business, or major life event — a different strategy may be more suitable. We’ll help you think through all your options before moving forward.
Yes, under the right conditions. Some REITs may acquire Delaware Statutory Trust (DST) interests and issue OP units in return — enabling a 721-style transition. However, the IRS is clear that there must be no pre-arranged agreement to do this at the time you invest in the DST. A general industry rule of thumb is a two-year waiting period between the 1031 into the DST and the REIT’s acquisition of the DST interests.
We work closely with clients and their CPAs to ensure the structure holds up under scrutiny. This hybrid approach can be especially attractive for investors looking to combine short-term deferral with long-term simplification.
Yes — and for many clients, that’s the driving factor. Real estate can be difficult to transfer, divide, or manage across generations. A 721 exchange helps simplify your estate by converting illiquid property into assets (like REIT shares) that are easier to administer and distribute.
It also allows for strategic timing of gain recognition — or complete elimination of capital gains if the assets are held until death and receive a full step-up in basis. If you’re planning for your spouse, children, or charitable beneficiaries, a 721 exchange can help reduce complexity and enhance flexibility.
Related Articles
721 Exchanges: Potential Tax Saving Strategy For Appreciated Real Estate Owners
